When it comes to comparing the cost of banking services, the need to dig below the surface is necessary.
Most public entities will conduct banking Request For Proposals (RFP) to compare pricing on bank services and products. In these RFPs, the level proposed for an earnings credit rate (ECR) plays an important role in determining best pricing. But that may not always be the case.
Externally, banker(s) will view each client as a whole relationship. But internally to the bank, each service or type of deposit account is viewed separately. Here’s the most important thing to remember: the cost for individual banking services and the level of rates offered on bank deposits have their own separate profit centers. They must stand alone and be compared separately.
An ECR is used to determine the interest earnings a bank calculates internally for the level of deposits necessary to cover banking fees. This level can vary from .50% to over 1.25%. However, that’s only half of the real calculations in how the bank covers its cost.
It is important to note that bank fees for products have built-in profit margins to cover the cost of services and overhead. For large national banks, the pass-through costs for their organic overhead are greater than those of local community banks. Bear in mind that local community banks need to cover the costs for outside, third-party support and services; these might be higher due to a smaller number of clients vs. national banks.
As a former Market President of a major bank, here are some tips you should consider when determining the best bank pricing:
1.) Internally, banks price treasury services separately from deposit rates. So should you! Keep in mind that banks internally price their treasury services independently of treasury management of deposits. Since they are priced separately inside the bank, you should also view them separately when comparing pricing. Even though the industry makes you think they are intertwined, you’ll get the best pricing on your banking services and the highest yield on your cash if you consider them independently.
2.) Request a proposed ECR rate, and one that will readjust as the Federal Reserve increases the Fed fund rate. Ideally, the sharing arrangement between you and the bank should be a 50/50 split. As rates increase, so should the narrowing of the spread.
3.) Be sure to have the bank disclose any FDIC charges related to deposits being held by the bank. You may have a higher ECR but if FDIC charges creep in, the less competitive your ECR may be. There needs to be a balance on both sides of the relationship.
4.) A wholesome relationship and strong communications between you and your banker(s) are imperative. There is a direct link between better pricing and strong ties with your bank.
At three+one, we believe in strong relationships with your financial institutions. As interest rates change, so does the value of your deposits and how they relate to the overall value of your banking services and fees. As an independent liquidity analysis and data firm, we provide a pure, unbiased perspective around both sides of any banking relationship.
There is a real cost to doing business. To make a true comparison—and be fair to all involved, including those your entity serves—it is important to know what your real costs are.
We’re here to help you sort it all out.
The trends continue: short-term interest rates are still on the rise, the economy is growing, technology is advancing, and banks want your business. That is good for you and your banks.
Let me breakdown each of these trends:
First, short-term interest continues to rise and I expect this trend to continue throughout 2019. The Federal Reserve wants to bring short-term rates back up to what it views as normal levels: 3% to 4%.. This means you will make a greater interest earnings on your cash and banks will make more net-interest margin on deposits, making it appealing to both sides of the relationship.
Second, the U.S. economy is improving and above most expectations. A better economy means higher tax receipts for public entities, a strong job market for college graduates, and a more stable lending base for banks. All that is good for everyone as well.
Third, advancing technology brings new levels of productivity both personally and professionally in today’s marketplace. The ability to do banking transactions faster, virtually, and at your fingertips, allows greater access, control, and opportunity whenmanaging your cash. It also gives banks greater ease in monitoring and managingdeposits and transactions. These tech advances are both great for you and helpful to your banks.
Finally, as rates rise so does the spread that banks make on deposits. As a result, banks are more willing to raise deposit rates—if asked. The need to communicate with your banks as rates go up is imperative if you are to make the most of this rising-rate environment. This is good news and for both you and the banks, as you will both experience more interest earnings.
Rising rates, a stronger economy, advancing technology, and a desire for banks to gain and keep your business. They all have all the makings of a great 2019.
The link to ensuring success is the support and services of threeplusone. This is a fact. Our proprietary liquidity analysis and data will enable your entity to be proactive in managing all its cash in a rising-rate environment, while adopting new technologies and enhancing itsbanking relationship. And that is good news for both your entity and your bank.
A personal relationship with your banker is everything. Being a good customer1 has its rewards but also comes with responsibilities.
Last week, I had a meeting with a local banker. She told me how much she enjoys personal interactions with her clients. She shared a story about a customer who had stopped by her office to just say hello and drop off a cup of coffee. A few weeks later that client called for help on an unexpected matter, and she responded immediately. His request required critical information and needed higher management approval. However, based on her knowledge of and relationship with the client, she was able to address all his questions while he was still on the line.
So many times we expect bankers to react to our requests at a moment’s notice. However, given higher demands and the need to service many clients, the ability to respond swiftly is often directly linked to the strength of the bond between client and banker.
So what does this mean?
1.) Given Dodd-Frank regulations—yes, they’re still in place—and the need to “Know Your Client,” strong communications between banks and entities are a must. No matter who initiates the call, please respond as soon as possible. Both sides need to get in the habit of responding quickly; that’s especially important when an unexpected need or emergency occurs.
2.) It’s healthy to meet with—or call—your banker at least once a quarter. This can be a challenge if you have multiple bank relationships. Make your primary bank and/or lending institution your top priority; secondary banks require only an annual meeting and review.
3.) Call, email, or stop by every once in awhile to just say hello. Let me assure you, as a former banker, such a greeting, with no requests attached, goes a long way. Those friendly touches will be remembered if and when you have to make special request later on.
4.) When there are significant changes at your office, notify your bankers. Provide any essential information as well as any forms the bank may need to keep on file. Don’t surprise your bankers well after the fact. This can cause mistrust and lead to delays when time is tight or the need is great.
5.) The right fit and comfort level are important elements to a healthy bank relationship. If you make an effort and you get little response back from your banker, then it might be time to consider a new banker.
Given our business, public service, higher Ed, and government banking experience, we believe in the strength of an engaging banking rapport. The value of a strong customer relationship with your banker(s) is everything, which will lead to better pricing, proactive deposit rate increases, and a quicker ability to respond to simple or complicated requests. And that will enable you do more for those you serve—your customers2.
Definition of customer (noun)-
1. Informal: A person one has to deal with or through.
2. A person who purchases goods or services from another; buyer; patron.
Origin 1400-50 late Middle English
Last week, Jamie Dimon, the CEO of J.P. Morgan Chase, discussed his bank’s major investment strategy in opening 400 new branches in several areas where it had not yet penetrated. The new locations are all in major metropolitan areas and include the cities and suburbs of Boston, Philadelphia, and Washington, D.C., among others. Bank of America is also showing signs of following the same strategy.
Is this a shift in direction from previous years where we’d seen banks closing their branches in large numbers? The answer is both “yes” and “no.”
First, the large banks are still closing branches in small cities and towns. The idea of using a corner bank branch to deposit and withdraw money through a teller is becoming a fading memory.
Second, the large banks are following the big money, which tends to be in major metropolitan areas. These locations will be staffed by small teams of wealth management advisors; there would also be interactive kiosks to manage typical financial transactions.
These big banks will follow the money flow, which is just as expected. The small community banks, on the other hand, will serve the smaller communities.
My only concern is that, as the banking landscape shifts, there will be a lack of banking competition—and that could lead to higher banking costs.
So how do you manage a lack of competition in the smaller markets? The answer lies in following:
1.) The need to develop stronger banking relationships is more important than ever. The greater the interactions you have with your banker(s), the more services that will be offered to your entity.
2.) Banks of all sizes want your general operating account and your recurring transaction business. They are not only interested in your entity’s deposits.
3.) Because your taxpayers and students come first, if you’ve been considering the importance of earning more on your operating cash, start identifying the rate potential your cash has and taking the steps to realize that interest on your financial statements.
4.) Increase your use of electronic banking and other advanced technology so your entity is not dependent on a nearby bank branch.
5.) If you are not receiving the best pricing, deposit rates, or banking services, then consider issuing a bank RFP to get them.
6.) If there is only one branch—or none—in your community, team up with other institutions or entities in your area to create a larger base of business. By creating a greater economy of scale, you’ll likely receive more banking services at better pricing and more attractive rates.
Banking continues to shift in a changing landscape. Because banks play an important role in managing your finances, they should be considered as strong partners but not sole providers. We live in a competitive national marketplace—and that can be used to your entity’s advantage.
The greater the competition, the better the pricing and rates you and community can receive.
Through a fair and independent process, three+one can help define your financial needs and ensure that banking’s shifting and competitive landscape works in your favor.
If your entity is not already making use of all its cash—and earning 1.0% or more in interest—let me share ten reasons why it makes sense to act now:
1.) To offer your taxpayers no tax increase—or even lower taxes.
2.) To help offset losses in the deduction of income and property taxes under the new tax reform law.
3.) To provide pay raises for your staff.
4.) To enable adding personnel to your police and/or emergency services departments.
5.) To fund the salary of one or more teachers or professors.
6.) To help offset likely increases in medical insurance premiums.
7.) To purchase previously unaffordable new technology.
8.) To cover unexpected budget expenses.
9.) To establish or add to reserve funds for future needs or projects.
10.) To fund high-efficiency equipment for your facilities that will provide additional savings or increased revenue.
We are at a crossroads as we see continually higher interest rates, possibly reaching 2.0% by year-end. If you do nothing, be prepared to explain yourself when your constituents ask “Why not?”
At three+one, we can help you take a proactive approach in making the most of higher rates through our proprietary liquidity analyses and data models. We are not a bank or a Registered Investment Advisor; our interests are solely those of your entity and your stakeholders.
The reasons are clear. Cash is a valuable asset that can make all the difference in meeting your budget goals—in 2018 and beyond.